1.

Income under Income Tax

What is Income?
Income, in its basic sense, refers to any profit, gain, or earnings that come to an
individual or entity, whether periodically, regularly, or even daily. This can come from
various sources such as business, employment, investments, or other avenues. The key
aspect is that income increases the wealth of the individual or entity, and is taxable under
the Income Tax Act.
Profits and gains: This refers to earnings from business, profession, or trade.
Dividends: Payments received from shares in a company.
Voluntary contributions: Charitable donations received by trusts or institutions that are
set up for religious, charitable, or similar purposes. This also applies to universities,
hospitals, or electoral trusts.
Perquisites: Benefits or perks received by employees that are not part of their salary but
are still taxable. Examples include company cars, rent-free accommodation, etc.
Allowances: Special payments made to employees to cover expenses related to their job
(e.g., travel, living costs in expensive locations).
Company benefits: Benefits received by company directors, shareholders with a
substantial interest in the company, or their relatives. This also includes payments made
by a company on behalf of these individuals for their personal obligations.
Business income: This includes sums chargeable to tax under business-related sections of
the Act, such as compensation for termination of contracts or insurance claims for
damaged business assets.
Capital gains: Profits from the sale of property, shares, or other assets, which are taxable
under the capital gains provisions.
Insurance business profits: Special rules apply for computing the profits of insurance
businesses, including those run by mutual insurance companies or cooperatives.
Winnings from gambling: Income from lotteries, betting, horse races, and other similar
activities.
Employee contributions: Amounts received from employees towards provident funds or
other similar welfare funds.
Keyman insurance: Amounts received under an insurance policy taken out for a key
person in a business.
Fair market value of inventory: In certain cases, the fair market value of inventory is
considered as income.
Gifts and money: Certain gifts, money, or property received without consideration are
taxable, particularly when the amount exceeds specified limits or involves certain
relatives or parties.
Subsidies and grants: Assistance from the government in the form of subsidies, grants, or
cash incentives is taxable unless specifically excluded (e.g., subsidies used for certain
assets or for trust funds).
Universal Radiators v. CIT (1993): The term “income” is considered very broad. It
covers more than just what we typically think of as regular earnings—it includes many
other forms of wealth or benefit that a person receives. The law (Section 2(24)) has
expanded the scope of income to include various types of earnings like profits, gains,
dividends, and even contributions to charitable trusts.
CIT v. Karthikeyan (1993): The term "income" should be interpreted in its natural and
general sense, and given the widest possible meaning. Since it appears in tax law, it has
to cover as many forms of earnings as possible.
Punjab Distilling Industries Ltd. v. CIT (1963): For taxation purposes, income is typically
considered to include gains or profits as distinguished from capital (the initial principal or
stock). Income is what increases your wealth, and it can be taxed by the government.
CIT v. Shaw Wallace Co: The court defines income as something that is received
periodically, with regularity, from a definite source. It's not limited to just one-time
payments but includes ongoing receipts.

2. Critically examine the constitutional provisions relating to taxation in

India/ Examine the legislative competence for enacting tax laws under the
Constitution of India

First read this https://lawbhoomi.com/constitutional-provisions-relating-to-taxation-in-

india/ and then read this - also write these - To critically examine the constitutional
provisions relating to taxation in India, it’s essential to break down the key articles
you’ve mentioned and understand their implications. Here's a detailed analysis:

1. Article 366(28) – Definition of "Taxation"

- This article defines "taxation" to include the imposition of any tax or impost, whether
general, local, or special.
- The term "tax" is construed broadly to cover various forms of levies imposed by the
government.
- Implications: This provision clarifies that taxation is not limited to specific kinds of
taxes but encompasses all forms of levies, giving the legislature flexibility in designing
tax laws.

2. Article 366(29) – Definition of "Tax on Income"

- The definition includes any tax in the nature of excess profits tax.
- Excess profits tax refers to a levy on profits exceeding a certain limit, often used
during wartime or economic crises.
- Implications: It expands the scope of what can be considered an "income tax" to
include taxes on excessive profits, allowing the government to regulate excessive wealth
accumulation.
 3. Article 366(29A) – Tax on Sale or Purchase of Goods
- This article expands the definition of "tax on the sale or purchase of goods" to cover
various transactions involving goods, even in cases where the sale or transfer might not
be direct.
- Sub-clauses:
- (a): Taxes transfers of property in goods even without a contract.
- (b): Includes works contracts where goods are involved in a larger contract (e.g.,
construction).
- (c): Applies to hire-purchase agreements.
- (d): Taxes the transfer of the right to use goods (e.g., leasing).
- (e): Covers supplies by associations to members.
- (f): Taxes the supply of food and drink as part of any service.
- Implications: This provision was introduced to address the complexities in taxation,
especially in cases involving mixed contracts, where goods and services are combined. It
ensures that such transactions are adequately taxed.

4. Article 300A – Right to Property

- Article 300A ensures that no person can be deprived of their property except by law.
- Implications: Although the property right is no longer a fundamental right, Article
300A ensures that any government action, including tax-related seizures or fines, must
have a legal basis. This provides a safeguard against arbitrary deprivation of property.

5. Money Bill (Article 110)

- Article 110(1)(a) states that a bill shall be deemed to be a Money Bill if it deals only
with provisions related to taxation (among other financial matters).
- Implications: This classification limits the role of the Rajya Sabha in financial
legislation, as Money Bills can only be introduced in the Lok Sabha. The Rajya Sabha
can make recommendations, but the Lok Sabha is not bound to accept them.

6. Financial Bills (Article 117)

- Article 117 provides for special provisions regarding financial bills, including bills
that deal with both taxation and non-taxation matters.
- Implications: Financial Bills are broader in scope than Money Bills, and unlike
Money Bills, they require approval from both houses of Parliament. However,
amendments related to reducing or abolishing a tax do not require special
recommendations.

7. Sovereign Authority and Taxation (Article 248(2))

- Article 248(2) gives Parliament the exclusive power to make laws, including imposing
taxes not mentioned in either the Union or State Lists.
 - Implications: This provision provides the central government with residual powers of
taxation, allowing Parliament to introduce new forms of taxes not specified in the
Constitution.
Art.19(1)(g) & Taxing - A taxing statute is not, per se, a restriction of the freedom under
Art.19(1)
(g). The policy of a tax, in its effectuation, might, of course, bring in some hardship in
some
individual cases. But that is inevitable… Every cause, it is said, has its martyrs. Then
again, the
mere excessiveness of tax or even the circumstances that its imposition might tend
towards the
diminution of the earnings or profits of the persons of incidence does not, per se, and
without more,
constitute violation of the rights under Art.19(1)(g).

Critical Examination of the Constitutional Provisions on Taxation:

- Federal Structure and Taxation: The Constitution distributes the power to tax between
the Union and State governments, as outlined in the Union List, State List, and
Concurrent List in the Seventh Schedule. While the Union can levy taxes like income tax,
customs duties, and excise, states can impose taxes like land revenue, stamp duties, and
sales tax.
- Article 248(2) grants Parliament the exclusive power to impose taxes not covered in
the lists, reflecting India's unitary bias in financial matters.
- Judicial Safeguards: Article 300A provides a safeguard against arbitrary state actions
by ensuring that no person is deprived of property (through taxation or otherwise)
without a legal framework.
- Complexity in Indirect Taxes: Article 366(29A) was introduced to tackle the complex
nature of indirect taxation, especially where goods and services are combined (as in the
case of VAT, sales tax, or the Goods and Services Tax post-2017).

Conclusion:
The constitutional provisions provide a robust framework for taxation in India, balancing
the powers between the Union and the States while ensuring that the legislative process is
structured (e.g., through Money Bills). However, the residual power of the Union in
taxation matters and the complexity of some indirect tax provisions can sometimes tilt the
balance in favor of central authority, sparking debates on fiscal federalism.

The Constitution of India is the supreme law of the land, and all other laws, including tax
laws like the Income Tax Act, 1961, must be interpreted in light of the constitutional
framework. Taxation, though primarily a revenue-raising mechanism, also serves as a
tool for social and economic regulation. The Supreme Court of India has played a vital
role in upholding the principles of constitutional taxation. Below are case laws that
outline key principles related to taxation and its constitutional validity.
CASE LAWS
1. CIT v. Harijan Nigam, 226 ITR 696
- Key Issue: Subordination of Tax Laws to the Constitution.
- Decision: The court held that all laws, including the Income Tax Act, must be
interpreted in harmony with the Constitution. The Income Tax Act is subordinate to the
Constitution, and any provision of this Act must be consistent with constitutional
principles.
- Implication: This case emphasizes that the Constitution is the supreme law and any
tax law must conform to constitutional provisions, especially in terms of legislative
competence and fundamental rights.

2. Jindal Stainless Ltd. & Anr v. State of Haryana & Ors, (2016)
- Key Issue: Use of Taxation for Social Control vs. Free Trade.
- Decision: The court recognized that taxation serves not just as a tool for raising
revenue but also as an instrument of social control. Taxation can be used to further social
objectives, such as reducing inequalities or promoting regional development. However,
taxation should not infringe upon the freedom of trade and commerce guaranteed under
Article 301 of the Constitution.
- Implication: The judgment shows that while taxation can serve social objectives, it
should not unduly restrict free trade and commerce. In case taxation acts as a restraint on
trade, its constitutionality may be questioned.

3. Jagannath Baksh Singh v. State of UP, 46 ITR 169 (SC)

- Key Issue: Constitutionality of Tax Laws under Article 13.
- Decision: The court held that for any tax law to be constitutionally valid, two
conditions must be met:
1. The legislature that passed the law must have the competence to enact such a law,
as defined by the lists in the Seventh Schedule of the Constitution.
2. The law should not violate any fundamental rights under Part III of the
Constitution, making it vulnerable to challenges under Article 13.
- Implication: This case laid down the fundamental test for determining the
constitutionality of tax laws, focusing on both legislative competence and adherence to
fundamental rights.

Conclusion:
These case laws underscore two main principles:
- Legislative Competence: Every tax law must be passed by the appropriate legislative
body (either Union or State, as per the Seventh Schedule) to be constitutionally valid.
 - Fundamental Rights and Free Trade: Tax laws must not infringe upon fundamental
rights or obstruct the free flow of trade and commerce within India. If they do, they may
be subject to judicial review and struck down for being unconstitutional.

Thus, taxation in India, while being an important tool for both revenue generation and
social regulation, must always conform to the broader constitutional principles of
legislative competence and protection of fundamental rights.

Explain the division of taxing of power between centre and state under part 12 of the
constitution of India.
Answer -
Detailed Explanation on the Division of Taxing Powers under the Three Lists of the
Seventh Schedule

The Seventh Schedule of the Constitution of India provides for the distribution of powers
between the Centre and the States, which includes taxing powers. This distribution is laid
out across three lists:

1. Union List (List I)

2. State List (List II)
3. Concurrent List (List III)

Each list specifies the areas where either the Union government, State governments, or
both have legislative and executive authority. The Union List provides exclusive
authority to the Parliament, the State List gives exclusive powers to the State legislatures,
and the Concurrent List allows both Parliament and State legislatures to legislate, though
Union law prevails in case of conflict.

1. Union List (List I)

The Union List consists of matters where only the Union Parliament has the exclusive
power to legislate. These include significant areas of national interest, and the Union
government is the sole authority to impose taxes in these areas. The following are some
of the key tax-related entries under the Union List:

- Entry 82: Taxes on income other than agricultural income

The Union has the exclusive power to impose taxes on all income except agricultural
income, which falls under the State List.

- Entry 83: Duties of customs, including export duties

 Only the Union can levy duties on imports and exports, regulating trade at international
borders.

- Entry 84: Duties of excise on certain goods

The Union imposes excise duties on certain goods manufactured or produced in India.
This includes petroleum, tobacco products, and other key goods except alcohol for human
consumption (which falls under the State List).

- Entry 85: Corporation tax

This tax is levied on the profits of companies and is exclusively within the purview of
the Union government.

- Entry 86: Taxes on capital value of assets, excluding agricultural land

The Union can levy taxes on the capital value of assets belonging to individuals and
companies, but agricultural land is excluded from this taxation.

- Entry 87: Estate duty in respect of property other than agricultural land
The Union can impose estate duty on the transfer of property after death, excluding
agricultural land.

- Entry 88: Duties on succession to property other than agricultural land

The Union has the authority to levy taxes on succession to property other than
agricultural land.

- Entry 89: Terminal taxes on goods or passengers carried by railways, sea, or air
Taxes related to transportation of goods and passengers through major national
infrastructure such as railways, seaports, and airports are controlled by the Union.

- Entry 90: Taxes on transactions in stock exchanges and futures markets

The Union imposes taxes on financial transactions and trading on stock exchanges and
commodity markets.

- Entry 91: Stamp duties on certain financial documents

Stamp duties on financial instruments like bills of exchange, promissory notes,
insurance policies, and transfer of shares fall under the Union’s authority.

- Entry 92A: Taxes on inter-state sale or purchase of goods

The Union can levy taxes on the sale or purchase of goods that occur across state
boundaries.

- Entry 92B: Taxes on consignments of goods in inter-state trade or commerce

 The Union has the authority to impose taxes on consignments, even if the goods are
being transported from one state to another within the same business.

- Entry 97: Any other matter not enumerated in List II or List III, including any tax not
mentioned in either of these Lists
This entry acts as a residuary power, giving the Union Parliament the right to legislate
on any matter or impose any tax that is not specifically mentioned in the State or
Concurrent Lists.

These taxes help the Union government generate revenue for national expenditures like
defense, international trade, national highways, and more.

---

2. State List (List II)

The State List contains subjects where State Legislatures have the exclusive right to
legislate, including specific areas of taxation. These taxes fund state-level projects and
developmental activities. Here are some key tax-related entries under the State List:

- Entry 45: Land revenue

States have the power to levy land revenue, which is a tax on land ownership and usage
within their territory.

- Entry 46: Taxes on agricultural income

States can impose taxes on income derived from agriculture, which is the mainstay of
the rural economy in many parts of India.

- Entry 47: Duties in respect of succession to agricultural land

States can levy duties on the succession or inheritance of agricultural land.

- Entry 48: Estate duty in respect of agricultural land

States have the exclusive right to impose estate duties on the transfer of agricultural
land after death.

- Entry 49: Taxes on lands and buildings

States can impose property taxes on land and buildings situated within their boundaries.

- Entry 50: Taxes on mineral rights

States can levy taxes on mineral rights, although Parliament may impose limitations.
- Entry 51: Duties on alcoholic liquors, narcotics, etc.
States can impose excise duties on alcoholic beverages, drugs, opium, and other similar
goods intended for human consumption.

- Entry 52: Taxes on the entry of goods into a local area for consumption, use, or sale
States can impose entry taxes on goods brought into a local area for sale or
consumption.

- Entry 53: Taxes on the sale or consumption of electricity

States have the right to impose electricity taxes on the generation and sale of electricity
within their borders.

- Entry 54: Taxes on the sale or purchase of goods (other than newspapers)
States have control over sales tax, including VAT and GST on goods and services that
are traded within their state boundaries, subject to the GST laws.

- Entry 55: Taxes on advertisements (other than newspapers)

States have the right to impose taxes on advertisements, excluding those in newspapers.

- Entry 56: Taxes on goods and passengers carried by road or inland waterways
States can impose taxes on the transport of goods and passengers via roads or
waterways within the state.

- Entry 57: Taxes on vehicles

States have the authority to levy taxes on vehicles used within their territory, including
registration and road taxes.

- Entry 58: Taxes on animals and boats

States can impose taxes on animals used for commercial purposes and on boats used for
transportation within the state.

- Entry 60: Taxes on professions, trades, callings, and employment

States can levy a professional tax on individuals practicing professions or engaging in
trade within the state.

- Entry 62: Taxes on luxuries, including entertainment, betting, and gambling

States can impose taxes on luxury items and services, including entertainment, betting,
and gambling activities.

- Entry 63: Rates of stamp duty on documents (other than those specified in Union List)
 States control the rates of stamp duty on most documents, except those listed in the
Union List.

The revenue generated through these taxes supports state-specific programs such as
education, healthcare, infrastructure development, and welfare schemes.

---

3. Concurrent List (List III)

The Concurrent List includes subjects where both the Union and State legislatures can
enact laws. However, in case of a conflict between central and state law, Union law
prevails. The taxation powers under the Concurrent List are limited, but there are some
relevant entries:

- Entry 43: Incorporation, regulation, and winding up of trading corporations

Both the Centre and States have the power to legislate on the incorporation and
regulation of companies, except for co-operative societies.

- Entry 44: Incorporation, regulation, and winding up of corporations, whether trading or

not, with objects not confined to one State
The Union and States can legislate on the regulation of corporations that operate across
state boundaries.

While taxation is not a significant area of legislation in the Concurrent List, the existence
of joint legislative powers reflects the cooperative federalism model of the Indian
Constitution.

Under the Concurrent List, both the Union and State governments have the authority to
legislate on certain taxes, such as those on mechanically propelled vehicles and stamp
duties.

1. Taxes on Mechanically Propelled Vehicles:

- State governments primarily levy taxes on vehicles (e.g., registration fees, road taxes)
to fund infrastructure and regulate transportation. The Union sets broad regulations but
does not directly impose these taxes.

2. Stamp Duties:
- Stamp duties are taxes on legal documents. The Union government levies duties on
financial instruments like bills of exchange and transfer of shares, while State
governments impose duties on property transactions, lease agreements, and contracts.
 States control most stamp duties, especially on property-related documents, which are a
major revenue source.

CASE LAWS : Both taxation powers reflect a balance between the Union and States,
promoting cooperative federalism.
Retrospective Effect of Taxation Laws:

1. Power to Levy Taxes Retrospectively:

Parliament has the authority to impose taxes with retrospective effect, meaning it can
apply taxes to past transactions, provided that such action is reasonable and serves the
public interest. In Ramakrishna v State of Bihar [50 ITR 171], the court upheld this
principle, highlighting that retrospective taxation is permissible under the law if it meets
these conditions.

2. Presumption of Constitutional Validity:

Any taxation provision enacted by Parliament or a State Legislature is presumed to be
constitutionally valid unless declared ultra vires (beyond its powers) by the Supreme
Court or a High Court. This principle was emphasized in CIT v Shah Elec [207 ITR
350].

3. Burden of Proof on Challengers:

There is a presumption in favor of the constitutionality of laws. If a provision is
challenged on constitutional grounds, the burden is on the challenger to prove that the
law clearly violates constitutional principles, as noted in Kunhammed v UOI [176 ITR
481].

In summary, Parliament's power to levy taxes retrospectively is subject to the

reasonableness test, and there is a strong presumption of constitutionality for taxation
statutes unless proven otherwise.

Question 3: Explain the process of computing total income

https://blog.ipleaders.in/heads-income/

1. Income from Salary

● Gross Salary: This includes basic salary, allowances (like house rent allowance (HRA), transport
allowance), bonuses, and commissions.
● Exemptions under Salary: Certain parts of the salary, such as HRA, are exempt from tax if
specific conditions are met.
● Standard Deduction: A flat deduction may be allowed, reducing the gross salary.
Taxable salary income is computed as:
Gross Salary - Exemptions (e.g., HRA) - Standard Deduction.

2. Income from House Property

● Rental Income: If a property is rented, rental income forms a part of the total income.
● Deductions: A standard 30% deduction for maintenance is usually allowed. Municipal taxes paid
can also be deducted from rental income.
● If there is a loan taken for the property, interest on the loan may be deductible.

Taxable income from house property is computed as:

Gross Rent - Standard Deduction (30%) - Municipal Taxes - Interest on Loan.

3. Profits and Gains from Business or Profession: For individuals engaged in trade, business,
or professional services, this head of income covers the profits generated after deducting expenses like
rent, salaries, and other costs necessary for the business.

1. Income Considered: This section accounts for income generated from any business or
professional activities carried out by the taxpayer. It includes:
○ Profits from the business
○ Gains or receipts from professional services
○ Any other income generated by the business or profession
2. Allowable Deductions: From this income, taxpayers can deduct certain expenses incurred to
operate the business or profession, such as:
○ Rent, wages, or salaries paid
○ Cost of raw materials and other inputs
○ Depreciation on assets used for business
○ Interest paid on loans used for business purposes
○ Any other legitimate business expenses
3. Depreciation and Losses: It includes provisions for carrying forward or setting off losses from
previous years and depreciation deductions on assets used for the business. These adjustments are
crucial in determining the final profit figure that will be taxed.
4. Adjustments for Personal Expenses: Expenses of a personal nature that are included in the
accounts but not actually incurred for the business are disallowed. This helps in calculating a
more accurate taxable income by eliminating non-business expenses.

4. Capital Gains
● This covers income from the sale of capital assets like property, shares, or bonds.
● Short-term Capital Gains: If the asset is sold within a short period (usually less than 1-3 years,
depending on the asset), it's treated as short-term capital gains.
● Long-term Capital Gains: If held for longer, it benefits from indexation (adjusting the cost for
inflation) and enjoys favorable tax rates.

Taxable capital gains are computed as:

Sale Price - Cost of Acquisition - Cost of Improvement - Expenses related to Sale.

5. Income from Other Sources

 ● This includes any other income, such as interest on savings, dividends, lottery winnings, or
gifts.
● Deductions might be available for certain income types under this category, though not always
applicable.

Taxable other income is simply the total income from these sources after allowable deductions.

6. Aggregate Total Income

After calculating the income under each head (salary, house property, capital gains, and other sources), all
are added together to form the gross total income.

7. Deductions under Section 80C to 80U

Certain deductions can be applied to the gross total income under sections like:

● Section 80C: Investments in retirement funds, life insurance, etc.

● Section 80D: Medical insurance premiums.
● Section 80E: Interest on education loans.
● Section 80G: Donations to charities.

Once these deductions are applied, the result is the taxable income.

Final Computation:
1. Gross Total Income = Income from Salary + Income from House Property + Capital Gains +
Income from Other Sources
2. Deductions = Sum of all applicable deductions under various sections (80C to 80U)
3. Taxable Income = Gross Total Income - Deductions

This taxable income is then subject to the relevant tax rates and slabs, and the tax liability is computed
accordingly.

Example Scenario
Mr. Kumar is a salaried individual, owns a house that he rents out, runs a small business on the side,
sold a piece of property this year, and also earns income from interest on savings. Below is the
breakdown of his income and the steps to compute his taxable income:

1. Income from Salary:

● Gross Salary: ₹12,00,000 (includes basic salary, HRA, and other allowances)
● HRA Exemption: ₹1,50,000 (if he qualifies for HRA exemption)
● Standard Deduction: ₹50,000

Taxable Salary Income:

12,00,000−1,50,000(HRA)−50,000(StandardDeduction)=₹10,00,00012,00,000 -
1,50,000 (HRA) - 50,000 (Standard Deduction) = ₹10,00,000
12,00,000−1,50,000(HRA)−50,000(StandardDeduction)=₹10,00,000

2. Income from House Property:

● Gross Rent Received: ₹3,60,000 per year (₹30,000 per month)
● Standard Deduction (30%): ₹1,08,000 (30% of ₹3,60,000)
● Municipal Taxes Paid: ₹20,000
● Interest on Loan: ₹1,00,000 (interest on a home loan)

Taxable Income from House Property:

3,60,000−1,08,000(StandardDeduction)−20,000(MunicipalTaxes)
−1,00,000(Interest)=₹1,32,000

3. Profits and Gains from Business or Profession:

● Income from Business: ₹5,00,000
● Allowable Deductions:
○ Rent paid for office: ₹1,00,000
○ Employee salaries: ₹1,50,000
○ Depreciation on equipment: ₹50,000
○ Interest on business loan: ₹20,000

Taxable Profits:

5,00,000−(1,00,000 + 1,50,000 + 50,000 + 20,000) = ₹1,80,000

4. Capital Gains:
● Sale of Property: ₹20,00,000
● Cost of Acquisition: ₹10,00,000
● Cost of Improvement: ₹2,00,000
● Expenses Related to Sale: ₹50,000
● Indexation Benefit (if applicable): Adjusted cost = ₹14,00,000

Taxable Capital Gain:

20,00,000−(14,00,000 + 50,000) = ₹5,50,000

5. Income from Other Sources:

● Interest from Savings Account: ₹20,000
● Dividend Income: ₹10,000

Taxable Income from Other Sources:

₹20,000 (Interest) + ₹10,000 (Dividends) = ₹30,000

6. Aggregate Gross Total Income:
Now, we add the income from all heads to compute the Gross Total Income.

₹10,00,000(Salary) + ₹1,32,000 (HouseProperty) + ₹1,80,000 (Business) + ₹5,50,000 (CapitalGains) +

₹30,000 (OtherSources) = ₹18,92,000

7. Deductions under Section 80C to 80U:

Mr. Kumar can claim deductions under various sections:

● Section 80C: ₹1,50,000 (investment in PPF, LIC premiums, etc.)

● Section 80D: ₹25,000 (health insurance premium)
● Section 80G: ₹20,000 (donations to a recognized charity)

Total Deductions:

₹1,50,000 + ₹25,000 + ₹20,000 = ₹1,95,000

8. Taxable Income:
After applying the deductions, Mr. Kumar’s taxable income is:

18,92,000 − 1,95,000 = ₹16,97,000

9. Final Tax Computation:

Based on the applicable tax rates and slabs, the final tax liability will be calculated on ₹16,97,000. The
relevant rates will depend on the income tax slabs for the financial year.

This example illustrates how income from various sources is computed, deductions are applied, and the
taxable income is determined. The final step would involve applying the correct tax slab rates to calculate
the tax payable.

4. What is previous year and assessment year

Previous Year vs Assessment Year under the Income Tax Act
The Previous Year and Assessment Year are two essential concepts under the Income
Tax Act, 1961, and they help determine when income is earned and when it is taxed. Let's
explain these concepts in detail, followed by their differences and examples.

1. Previous Year (Sec. 3)

The term Previous Year refers to the financial year in which income is earned by the
assessee. It is the year that immediately precedes the Assessment Year.
A financial year starts on April 1st and ends on March 31st of the following year.
The income earned during this period is taxable in the next year, called the Assessment
Year.
Key Features:

Defined under Section 3 of the Income Tax Act.

The year in which the income is earned.
It always precedes the Assessment Year.
Example:

For income earned between April 1, 2023, and March 31, 2024, the financial year is
2023-24, and it is called the Previous Year.

2. Assessment Year (Sec. 2(9))

The term Assessment Year refers to the year immediately following the Previous Year in
which the income of the assessee is assessed and taxed by the Income Tax Department.

Like the Previous Year, the Assessment Year also starts on April 1st and ends on March
31st of the following year.
Income earned during the Previous Year is taxed in the Assessment Year.
Key Features:

Defined under Section 2(9) of the Income Tax Act.

It is the year in which income is taxed, based on the income earned in the Previous Year.
The same timeline applies as the Previous Year but it follows it chronologically.
Example:

The income earned between April 1, 2023, and March 31, 2024 (Previous Year 2023-24)
will be assessed and taxed during the Assessment Year 2024-25. Illustration:
Let's assume that an individual earned an income of ₹10,00,000 from April 1, 2023, to
March 31, 2024 (Previous Year 2023-24).

Previous Year: This period (April 1, 2023, to March 31, 2024) is called the Previous Year
2023-24 because the income was earned during this time.
Assessment Year: The income of ₹10,00,000 earned during the Previous Year will be
taxed in the Assessment Year 2024-25 (April 1, 2024, to March 31, 2025). During this
year, the taxpayer will file their return of income for the previous year, and the tax
authorities will assess and levy tax on that income.
In summary:

Previous Year 2023-24: Income is earned.

Assessment Year 2024-25: Income is taxed.
This distinction is essential because income tax is not levied immediately when the
income is earned but only in the next year, after the end of the financial year when the
income tax returns are filed and processed.
[8:51 AM, 3/10/2024] Theresa Charles: 4th
[8:51 AM, 3/10/2024] Theresa Charles: The Previous Year and Assessment Year are both
key terms under the Income Tax Act, 1961, but they serve different purposes. The
Previous Year, defined under Section 3, is the financial year during which income is
earned by the assessee. This year runs from April 1st to March 31st of the following year,
and the income earned during this period is not taxed immediately. Instead, it will be
taxed in the Assessment Year, which is defined under Section 2(9). The Assessment Year
follows the Previous Year and also runs from April 1st to March 31st, but it is the year in
which the income earned during the Previous Year is assessed and taxed. Essentially, the
Previous Year is the year in which the income is generated, while the Assessment Year is
the year in which that income is taxed.

For instance, if income is earned between April 1, 2023, and March 31, 2024, this period
is referred to as the Previous Year 2023-24, and the income will be taxed during the
Assessment Year 2024-25. This distinction helps ensure that income tax is assessed after
the financial year ends, allowing individuals and businesses to file their returns and the
authorities to process them accordingly. Thus, the Previous Year always comes before the
Assessment Year, and income is only taxed in the year that follows its earning

The Previous Year and Assessment Year are both key terms under the Income Tax Act,
1961, but they serve different purposes. The Previous Year, defined under Section 3, is
the financial year during which income is earned by the assessee. This year runs from
April 1st to March 31st of the following year, and the income earned during this period is
not taxed immediately. Instead, it will be taxed in the Assessment Year, which is defined
under Section 2(9). The Assessment Year follows the Previous Year and also runs from
April 1st to March 31st, but it is the year in which the income earned during the Previous
Year is assessed and taxed. Essentially, the Previous Year is the year in which the income
is generated, while the Assessment Year is the year in which that income is taxed.

For instance, if income is earned between April 1, 2023, and March 31, 2024, this period
is referred to as the Previous Year 2023-24, and the income will be taxed during the
Assessment Year 2024-25. This distinction helps ensure that income tax is assessed after
the financial year ends, allowing individuals and businesses to file their returns and the
authorities to process them accordingly. Thus, the Previous Year always comes before the
Assessment Year, and income is only taxed in the year that follows its earning.
5. Define persons under Income Tax Act
Section 2(31) of the Income Tax Act, 1961, defines "person" as an inclusive term
covering various entities. It includes seven categories of taxpayers. The purpose of this
section is to make a clear distinction between the various classes of entities subject to
taxation.

Categories of Persons as Defined in Section 2(31)

The term "person" includes the following entities:

Individual: A human being, which is the most common type of taxpayer.

Hindu Undivided Family (HUF): A distinct entity for taxation purposes, recognized
under Hindu Law.
Company: Includes both Indian and foreign companies.
Firm: Includes partnerships and Limited Liability Partnerships (LLPs).
Association of Persons (AOP) or Body of Individuals (BOI): Groups of individuals or
entities who jointly earn income.
Local Authority: Municipalities, panchayats, and other local bodies.
Artificial Juridical Person: Entities like deities, trusts, and institutions that do not fall
under the above categories but are recognized as legal persons.
Detailed Explanation of Each Category with Case Law

1. Individual
An individual is a natural human being, which includes both men and women. The term
individual is distinct from HUFs, firms, and companies, and only refers to a single person
or multiple persons treated individually.

Case Law: In Udham Singh v. CIT [1987], the Orissa High Court held that "individual"
refers specifically to human beings. This distinguishes individuals from collective entities
such as firms or HUFs.
However, it is well established that the term "individual" can also refer to a group of
individuals.
2. Hindu Undivided Family (HUF)
A Hindu Undivided Family is a unique legal entity that consists of individuals lineally
descended from a common ancestor, including their wives and unmarried daughters.

Case Law: The Supreme Court in Sujit lal Chabbda v CIT ruled that HUFs are distinct
entities and subject to taxation under a separate category. The head of the family is
known as the "Karta," and all members (coparceners) share ownership of the family
property.
3. Company
A company, as defined in the Income Tax Act, includes entities registered under the
Companies Act, 1956, as well as other institutions assessed as companies under previous
tax laws.

Case Law: The term "company" also extends to entities incorporated outside India. In 4.
Firm
A firm is an entity established under the Indian Partnership Act, 1932, or the Limited
Liability Partnership Act, 2008.

5. Association of Persons (AOP ik) or Body of Individuals (BOI)

An "association of persons" refers to individuals who come together for a common
purpose, especially to earn income. A "body of individuals" can include individuals who
carry on some activity but do not necessarily share a common purpose.

Case Law: The Supreme Court in CIT v. Indira Balkrishna [1960] explained that an AOP
must be formed with the objective of generating income. In contrast, a BOI refers to
individuals who earn income collectively without a common objective. In Deccan Wine
& General Stores v. CIT [1976], the court further clarified that BOI encompasses
individuals with a unity of interest, even if they do not have a common design.
6. Local Authority
A local authority refers to entities like municipalities, panchayats, and district boards,
which are legally constituted under various laws, including the Cantonment Act, 1924.

7. Artificial Juridical Person

This category includes entities that are not natural persons but have been given legal
recognition. Examples include deities in temple trusts and other legal entities that do not
fall under the previous categories.

Illustration of Different Categories

Individual: Mr. A earns income from his job and is taxed as an individual.
HUF: A family led by Mr. B, where income from ancestral property is taxed in the name
of the HUF.
Company: XYZ Ltd., a company incorporated in India, pays corporate taxes.
Firm: A partnership firm, M/s ABC, earns profits, and the firm itself is taxed, though
individual partners also pay tax on their share of profits.
AOP: A group of investors form an AOP to invest in a joint venture, and the profits are
taxed under AOP.
Local Authority: The income of a municipality from commercial activities is taxed under
the category of local authority.
 Artificial Juridical Person: A temple trust managing a deity's assets is taxed under this
category.
Conclusion

The categorization of persons under Section 2(31) ensures that income tax is charged
based on the legal structure of the taxpayer, with appropriate distinctions made between
individuals, groups, and entities. Case laws have played a significant role in clarifying the
nuances of each category and ensuring that entities are taxed appropriately under the
Income Tax Act, 1961.

Question 7: Explain the taxability of agricultural income in income tax

Introduction

Under Indian income tax laws, agricultural income is generally exempt from tax as per Section
10(1) of the Income Tax Act, 1961. The reasoning behind this exemption stems from the Indian
Constitution, which gives state governments the right to levy taxes on agricultural income, while
the central government taxes non-agricultural income. However, not all income associated with
agriculture qualifies as agricultural income for tax exemption.

Definition of Agricultural Income

As per Section 2(1A) of the Income Tax Act, agricultural income is defined as:

1. Rent or Revenue from Agricultural Land: Any rent or revenue derived from land situated
in India, which is used for agricultural purposes(04 Agriculture Income)(Agricultural
Income).
2. Income Derived from Agricultural Operations: This includes income generated by
cultivating the land, performing any processes to make the produce marketable, or selling
such produce. The operations involved can be categorized into:
○ Basic operations like tilling, sowing, and planting seeds.
○ Subsequent operations such as weeding, protecting crops from pests, and
harvesting(Agricultural Income).
3. Income from Buildings Used for Agriculture: Income derived from any building used for
agriculture, such as a farmhouse, provided the building is situated on or near agricultural
land and used for agricultural activities.

Key Components and Conditions for Exemption

For income to qualify as agricultural and thereby exempt from tax, several conditions must be
fulfilled:

1. Land as the Primary Source: The income must directly arise from the land, and the land
must be in India. The land should be used for agricultural purposes, meaning there must
 be some expenditure of skill and labor on it, such as cultivating crops, growing trees, or
raising plantations.
2. Agricultural Operations Must be Performed: Both basic and subsequent agricultural
operations must be carried out to treat the income as agricultural. For example, sowing
seeds and harvesting crops are essential for income to be considered agricultural.
3. Immediate and Effective Source of Income: The land must be the immediate and
effective source of income. For instance, if rent is received from agricultural land, the
land should be used specifically for agricultural operations. If the income arises from a
source other than agricultural land, such as renting it out for non-agricultural purposes
(e.g., for film shooting), it will not be considered agricultural income.

Examples of Agricultural Income

● Rent received from agricultural land used for farming is considered agricultural income
and is exempt from tax.
● Income from selling crops grown on agricultural land or income from processing crops
(like threshing wheat or ginning cotton) to make them market-ready also qualifies.
● Income from Nursery Operations: The Supreme Court has held that income from growing
saplings and seedlings in nurseries is considered agricultural income and hence exempt
from tax.
● Income from Farmhouses: If the farmhouse is located on or near the agricultural land and
is used for storage or housing related to agricultural activities, the income derived from it
is exempt.

Instances Where Agricultural Income is Not Exempt

Not all activities related to agriculture are tax-exempt. Here are a few cases where income does
not qualify as agricultural income:

● Poultry farming, dairy farming, bee-hiving, and fish farming: These are not considered
agricultural activities, and the income from these sources is taxable.
● Sale of spontaneously grown trees: If trees grow naturally without human effort, the
income from their sale is not treated as agricultural income.
● Income from Salt Production: If salt is produced on land by using sea water, the income
is not agricultural as it involves no cultivation.
● Composite Income: Agricultural and Non-Agricultural Activities

In cases where a person is involved in both agricultural and non-agricultural activities, the
income is referred to as composite income. For example, businesses engaged in growing and
manufacturing crops such as tea, coffee, and rubber need to bifurcate their income:

● Tea: As per Rule 8 of the Income Tax Rules, 40% of the income derived from growing
and manufacturing tea is considered agricultural income and exempt, while the remaining
60% is taxable as business income.
● Coffee: Income from growing and curing coffee is treated as partly agricultural, and 25%
of the income is taxable.
 ● Rubber: 35% of income derived from growing and manufacturing rubber is taxable,
while the rest is exempt as agricultural income.

Tax Calculation Involving Agricultural Income

Although agricultural income itself is exempt from tax, it is included for rate purposes when
calculating tax liability if the individual has both agricultural and non-agricultural income. This
concept is known as aggregation. The agricultural income is added to non-agricultural income to
determine the applicable tax rate. However, no tax is levied directly on the agricultural income,
and the tax is calculated only on the non-agricultural portion at the higher rate.

For example:

● If a person earns ₹5 lakh from a non-agricultural source and ₹1 lakh from agriculture, the
tax rate is computed by adding both incomes (₹6 lakh), but the actual tax is levied only
on ₹5 lakh, using the rate applicable for ₹6 lakh.

Case Laws

● CIT v. Raja Benoy Kumar Sahas Roy (1957) 32 ITR 466 (SC)
This landmark case clarified the definition of agricultural income and the distinction
between agricultural and non-agricultural income. The Supreme Court held that income
from land qualifies as agricultural income if basic operations such as tilling the land,
sowing seeds, and other agricultural processes are performed. It established that both
basic and subsequent operations (like weeding, protecting crops, and harvesting) are
essential for income to be classified as agricultural(04 Agriculture Income)(Agricultural
Income).
● CIT v. Kamakhya Narayan Singh (1948) PC
In this case, the court determined that the source of the income must be the land
itself for the income to qualify as agricultural. The Privy Council ruled that when rent or
annuity is received based on a personal contract, and not directly from the agricultural
activity on the land, it is not considered agricultural income(04 Agriculture Income)
(Agricultural Income).
● Brihan Maharashtra Sugar Syndicate Ltd v. CIT (1946) 14 ITR 611 (Bom)
This case highlighted that the processing of agricultural produce to render it
marketable is still considered part of agricultural income. However, if a process is carried
out that goes beyond what is necessary to make the produce marketable (e.g., turning
sugarcane into sugar), the income from such an additional process is not classified as
agricultural income(04 Agriculture Income)(Agricultural Income).

Conclusion

Agricultural income enjoys special tax treatment in India, where it is generally exempt under
Section 10(1) of the Income Tax Act, 1961. However, specific conditions related to land use and
agricultural operations must be met for the income to qualify as exempt. Additionally, income
from composite agricultural activities, such as tea, coffee, and rubber, is partially taxable, and
aggregation is used when computing taxes in cases where an individual has both agricultural and
non-agricultural income.

This framework ensures that genuine agricultural income remains untaxed, while income from
other sources or activities related to agriculture, but not strictly agricultural, is subject to taxation
.

CASE LAW ANALYSIS - FIRST 6 CASE LAWS -

1)F.I.L.A.C. Analysis of CIT v. G.R. Karthikeyan (1993 Supp (3) SCC 222)

---

Facts:
- The assessee, G.R. Karthikeyan, participated in the All India Highway Motor Rally and won the
first prize of ₹20,000 from the Indian Oil Corporation and an additional ₹2,000 from the Rally,
totaling ₹22,000.
- The rally was not a race, but a test of endurance driving and vehicle reliability.
- The Income Tax Officer (ITO) included the prize money in the taxable income of the assessee,
relying on Section 2(24) of the Income Tax Act, which defines 'income' inclusively.
- The Appellate Tribunal held that the rally was not a race or game, and the sum should not be
taxed as income.
- The case was referred to the Madras High Court, which ruled in favor of the assessee, stating
that the sum did not represent ‘winnings’ as the rally was not a game of gambling or betting.

Issue:
Whether the sum of ₹22,000, received by the assessee from the rally, qualifies as ‘income’
under Section 2(24) of the Income Tax Act, 1961, and is subject to taxation.

Law:
1. Income Tax Act, 1961:
- Section 2(24): Defines 'income' as an inclusive term, covering winnings from lotteries, races,
games, betting, and other forms of income.
- Section 10(3): Exempts casual and non-recurring receipts from tax, unless they exceed
₹1,000, but excludes winnings from lotteries or races.
- Section 256(1): Allows reference to the High Court for clarification on tax matters.

2. Case Laws:
- Kamakshya Narayan Singh v. CIT (1943): Defined 'income' as difficult to define precisely but
broad in its scope.
 - Navinchandra Mafatlal v. CIT (1955): Stressed the need to give a liberal and broad
interpretation to the term 'income'.

Application:
- Definition of Income: The court held that Section 2(24) is an inclusive definition that covers a
wide range of receipts, and not just income from gambling or betting activities. Thus, any
monetary receipt, even if casual or non-recurring, can be considered income unless specifically
exempted.
- Nature of the Rally: The rally, while a test of skill and endurance, led to the assessee winning a
prize. The amount received was a return for his effort and skill, and not a windfall.
- High Court's Error: The Supreme Court noted that the High Court erred by narrowly
interpreting ‘winnings’ to mean only from gambling or betting. Instead, the word 'income' must
be given its widest possible meaning.
- Casual Income: Even if the prize was casual in nature, it still constituted income as per Section
10(3), because the amount exceeded ₹1,000.

Conclusion:
The Supreme Court concluded that the sum received by the assessee constituted income under
Section 2(24) of the Income Tax Act, 1961. The appeal was allowed, and the question referred
by the Tribunal was answered in favor of the Revenue.

2) To analyze the case CIT v. Sitaldas Tirathdas (1961) in the FILAC approach, which stands
for Facts, Issues, Law, Application, and Conclusion, here's a breakdown:

F - Facts
- The assessee, Sitaldas Tirathdas, had various sources of income, including property, shares,
and a firm in Bombay. His income for the assessment years 1953-54 and 1954-55 was Rs.
50,375 and Rs. 55,160, respectively.
- He sought to deduct Rs 1350 and Rs 18,000 from his total income for these two years,
claiming that these sums were paid as maintenance to his wife and children under a consent
decree passed by the Bombay High Court in 1953.
- There was no charge on property created for the payment of this maintenance, and the
assessee claimed the deduction under Section 9(1)(iv) of the Income Tax Act, relying on the
case Bejoy Singh Dudhuria v. CIT.
- The Income Tax Officer denied the deduction, and this decision was upheld by the Appellate
Assistant Commissioner and the Income Tax Appellate Tribunal. The High Court, however,
ruled in favor of the assessee, following prior rulings of the Bombay High Court.
- The Commissioner of Income Tax appealed to the Supreme Court.

I - Issues
1. Whether the amounts paid by the assessee as maintenance to his wife and children under a
decree were deductible from his total income?
2. Does the maintenance payment constitute a diversion of income by an overriding charge
before the income reaches the assessee?
 L - Law
- Section 9(1)(iv) of the Income Tax Act, 1922, which deals with deductions allowed from the
income of the property.
- Principle of Diversion by Overriding Title: Established in Bejoy Singh Dudhuria v. CIT and
subsequent cases. If income is diverted by an overriding charge before it reaches the taxpayer,
it is not considered part of their income. However, if the income reaches the taxpayer and is
then applied to fulfill an obligation, it remains the taxpayer’s income and no deduction is
allowed.
- Case law references:
- Bejoy Singh Dudhuria v. CIT
- P.C. Mullick v. CIT
- CIT v. Makanji Lalji
- V.M. Raghavalu Naidu & Sons v. CIT

A - Application
- The Supreme Court distinguished between the diversion of income by overriding title (as in
Bejoy Singh Dudhuria) and the application of income to discharge an obligation (as in P.C.
Mullick).
- In Bejoy Singh Dudhuria, a charge was created on the property, and the income was diverted
directly to the maintenance holder before it reached the assessee, making it non-taxable in his
hands.
- In contrast, in the present case, there was no charge on the property or its income. The
maintenance payments were not diverted before the income reached the assessee but were
made out of the income after it had already reached him.
- The Court noted that in this case, the obligation to pay maintenance was a personal obligation
of the assessee, and the income was applied to meet that obligation after it was received.
Therefore, the income was taxable, and no deduction could be allowed for the maintenance
payments.

C - Conclusion
The Supreme Court held that the amounts paid by the assessee as maintenance to his wife and
children could not be deducted from his total income because the income had already reached
the assessee before it was applied to fulfill his personal obligation. Therefore, the High Court’s
decision was reversed, and the question referred was answered in the negative. The appeal
was allowed with costs.

This ruling clarified that for deductions under income tax law, the nature of the obligation and
whether the income is diverted before reaching the taxpayer is crucial in determining whether
the income is taxable in the hands of the taxpayer.

3)C.I.T. v. Sunil J. Kinariwala

(2003) 1 SCC 660

 F.I.L.A.C. Approach

Facts:
- Sunil J. Kinariwala, a partner in the firm "M/s Kinariwala R.J.K. Industries," assigned 50% of
his 10% share in the firm (excluding capital) to a trust, the "Sunil Jivanlal Kinariwala Trust,"
created by him. The trust had three beneficiaries: his brother's wife, his niece, and his mother.
- The Income Tax Officer rejected the assessee's claim that 50% of the income had been
diverted to the trust at the source and, therefore, should not be included in his taxable income.
The officer viewed this as an application of income, not a diversion of income at source, and
invoked Section 60 of the Income Tax Act.
- The Appellate Assistant Commissioner allowed the assessee's appeal, excluding Rs. 20,141
from his total income, but the Tribunal reversed this decision.
- The High Court ruled in favor of the assessee, holding that there was an overriding title in favor
of the trust, and hence the income was diverted at source and could not be added to the
assessee's income.
- The Supreme Court was called to decide whether the income assigned to the trust could be
considered diverted by overriding title, thereby preventing it from being included in the
assessee’s income.

Issues:
1. Whether the assignment of 50% of the assessee's 10% share in the partnership firm to the
trust created an overriding title in favor of the trust, thus diverting income at source.
2. Whether the sum of Rs. 20,141, representing profits from the 50% assigned share, is the real
income of the assessee or the trust, and if assessable only in the hands of the trust.

Laws:
- Income Tax Act, 1961:
- Section 60: Deals with the transfer of income without transferring the asset from which the
income arises, making the income assessable in the hands of the transferor.

- Principles from Case Law:

- Bejoy Singh Dudhuria v. CIT [(1933) 1 ITR 135 (PC)]: Held that when income is diverted by
overriding title, it is not taxable in the hands of the assessee.
- P.C. Mullick v. CIT [(1938) 6 ITR 206 (PC)]: Differentiated between application of income
(after receipt) and diversion of income by overriding title (before receipt).
- CIT v. Sitaldas Tirathdas [(1961) 41 ITR 367]: Reaffirmed the principle that income diverted
by overriding title before reaching the assessee is not taxable in the assessee's hands.

Application:
1. The determinative factor is whether the income was diverted before it reached the assessee,
thus qualifying for exclusion from his taxable income. In this case, the trust had only a right to
receive 50% of the profits of the assessee's share in the partnership firm, and the income was
transferred to the trust after reaching the assessee.
2. The assignment of profits to the trust does not create an overriding title because the income
was not diverted at the source. The assessee received the income first and then transferred it to
the trust. Therefore, it falls under the application of income by the assessee and not a diversion
by overriding title.
3. The Supreme Court distinguished between cases where income is diverted by an overriding
title and where it is merely applied by the assessee after being received. The facts here do not
support a diversion at source.

Conclusion:
The Supreme Court ruled that the share of income assigned to the trust should be included in
the total income of the assessee. Therefore, the income was not diverted by overriding title but
was applied after receipt by the assessee, making it taxable in his hands. The questions were
answered in favor of the Revenue and against the assessee.

4) To analyze Maharaja Chintamani Saran Nath Sah Deo v. CIT (1971) using the FILAC
approach (Facts, Issues, Law, Application, Conclusion), the case can be broken down as
follows:

1. Facts:
- The original assessee, Maharaja Pratap Udainath Sah Deo, was the holder of an impartible
estate.
- In 1944, he leased mining rights over 171.03 acres of land to Aluminium Production Company
Ltd. for 30 years, accepting a Salami of Rs. 2,25,000 and additional payments in the form of rent
and royalties.
- In a prior lease of 1941 (for prospecting purposes), the same land was leased at Rs. 100 per
acre with higher royalty.
- The Income Tax Officer (ITO) assessed Rs. 2,20,000 out of the salami as an income rather
than a capital receipt, treating it as an advance payment of royalty.
- The Appellate Assistant Commissioner (AAC) disagreed, holding it as a capital receipt, but the
Appellate Tribunal later reversed this view.
- The High Court ruled that Rs. 20,000 could be treated as capital receipt and the rest, Rs.
2,00,000, as revenue receipt taxable under the Income Tax Act.

2. Issue:
- Whether the salami (Rs. 2,20,000) received by the assessee was a capital receipt (non-
taxable) or an income/revenue receipt (taxable under the Income Tax Act, 1922).

3. Law:
- The key principle in tax law is that capital receipts are not taxable, whereas revenue receipts
are taxable under income tax.
- Salami is generally considered a capital receipt since it represents the price for parting with a
capital asset (the leasehold rights), but there is scope for the authorities to examine if it contains
elements of income, such as advance royalty payments.
 Relevant case law:
- CIT v. Panbari Tea Co. Ltd. – Salami is treated as a capital receipt unless proven to have
elements of periodic payment camouflaged as a lump sum.

4. Application:
- The ITO argued that the high amount of salami and the lower royalty suggested the salami
was actually a capitalized royalty and should be treated as income.
- The Appellate Tribunal accepted this reasoning based on the comparison between the terms
of the leases from 1941 and 1944.
- However, the Supreme Court criticized this approach, highlighting that the nature of the lease
agreements was fundamentally different (one for prospecting, the other for long-term
exploitation).
- It emphasized that the onus to prove that the salami was not a capital receipt was on the
Revenue authorities. The comparison between a one-year prospecting lease and a 30-year
lease was not appropriate to infer a camouflaged income receipt.
- Moreover, the Mines Superintendent’s report estimating future mineral extraction was made
after the 1944 lease and could not be a reliable factor in determining whether the sum of Rs.
2,20,000 was capital or revenue in nature.

5. Conclusion:
- The Supreme Court ruled that the entire sum of Rs. 2,20,000 was capital receipt, reversing the
High Court's judgment.
- The revenue authorities had failed to discharge their burden of proving that the salami was
camouflaged royalty or advance income.
- Therefore, the appeal was allowed, and the amount in question was held not assessable as
income under the Income Tax Act, 1922.

5)Bacha F. Guzdar v. C.I.T., Bombay

AIR 1955 SC 74

Factual Matrix:
The appellant, Mrs. Bacha F. Guzdar, was a shareholder in two tea companies, Patrakola Tea
Company Ltd. and Bishnauth Tea Company Ltd., which engaged in both the cultivation and
manufacture of tea. During the accounting year 1949-50, she received a dividend of ₹2,750
from these companies. As per Rule 24 of the Indian Income Tax Rules, 1922, 60% of the
income from tea companies was exempt as agricultural income, while 40% was taxable as
income derived from business. The appellant argued that 60% of the dividend received should
be treated as agricultural income and be exempt under Section 4(3)(viii) of the Indian Income
Tax Act. However, the Income Tax authorities and the Appellate Tribunal ruled against her,
holding that dividends received by shareholders do not qualify as agricultural income. The case
was then referred to the Bombay High Court, which upheld the Tribunal's decision.
Subsequently, the matter was appealed to the Supreme Court.

Legal Issues:
The primary legal issue in this case was whether 60% of the dividend received by the appellant
from the tea companies, which had a portion of their income exempt as agricultural income,
could also be treated as agricultural income in the hands of the shareholder under Section 4(3)
(viii) of the Income Tax Act, 1922.

Arguments:
- Appellant's Argument: The appellant argued that since 60% of the tea companies' profits were
classified as agricultural income, 60% of the dividend distributed by the companies should also
retain the same character and thus be exempt from income tax.
- Revenue's Argument: The Revenue contended that the dividend was not agricultural income in
the hands of the shareholder, as it was not directly derived from land used for agricultural
purposes, but was rather a distribution of profits by a company to its shareholders. As such, the
entire dividend was liable to income tax.

Judicial Reasoning:
The Supreme Court examined the definition of "agricultural income" under Section 2(1) of the
Income Tax Act, 1922, which referred to rent or revenue derived directly from land used for
agricultural purposes. The Court observed that while the tea companies derived part of their
income from agricultural operations, the dividend distributed to shareholders did not have a
direct nexus with land. Rather, the shareholder's income arose from an investment in the
company and their right to participate in the company's profits. The Court noted that a dividend
is not derived from land but from the contractual relationship between the company and its
shareholders.

The Court emphasized that agricultural income must have a direct association with land, and
this association does not extend to dividends received by shareholders, even if the company's
income is partly agricultural. The Court also dismissed the analogy that income indirectly
connected to land could qualify as agricultural income, using the example of interest paid by an
agriculturist on a loan not being treated as agricultural income for the creditor.

Court’s Conclusion:
The Supreme Court upheld the decision of the lower courts and ruled that dividends received by
shareholders of tea companies could not be treated as agricultural income, as they did not have
a direct connection with land used for agricultural purposes. Therefore, the entire dividend was
liable to income tax.

Analysis (FILAC Approach):

- Facts: Mrs. Bacha F. Guzdar, a shareholder in tea companies, received dividends and claimed
that 60% of the dividend should be exempt as agricultural income.
- Issue: Whether dividends received by shareholders of tea companies can be considered
agricultural income and exempt under Section 4(3)(viii) of the Indian Income Tax Act.
- Law: Section 2(1) and Section 4(3)(viii) of the Indian Income Tax Act, 1922, define agricultural
income as revenue derived directly from land used for agricultural purposes.
- Application: The Supreme Court reasoned that dividends do not arise directly from land but
from the profits of the company, and hence, cannot be considered agricultural income. The
nexus between the dividend and agricultural land is indirect, and income from an investment in
a company does not change its nature based on the source of the company’s income.
- Conclusion: The dividend income received by the appellant could not be classified as
agricultural income, and thus the entire amount was liable to tax.

This case established the distinction between agricultural income and dividend income in the
hands of shareholders, emphasizing the need for a direct relationship with land to claim
exemptions on the grounds of agricultural income.

6)Premier Construction Co. Ltd. v. C.I.T., Bombay City

(1948) XVI ITR 380 (PC)

To apply the FILAC approach (Facts, Issues, Law, Application, Conclusion) to Premier
Construction Co. Ltd. v. C.I.T., Bombay City (1948), we can structure it as follows:

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Facts:
- Premier Construction Co. Ltd. (the assessee) was the managing agent of Marsland Price and
Company, Ltd. under a managing agency agreement.
- The assessee was entitled to remuneration based on the annual net profits of Marsland Price,
with a minimum guaranteed salary of Rs. 10,000 and a commission at the rate of 10% of the
company's net profits.
- Marsland Price's profits were partly derived from the manufacture of sugar, using sugarcane
grown on its own agricultural farms. This portion of the company's income was classified as
agricultural income, which is exempt from income tax under Section 4(3)(viii) of the Indian
Income-tax Act, 1922.
- The assessee claimed that the portion of its commission proportional to the agricultural income
of Marsland Price should also be treated as agricultural income and, therefore, be exempt from
income tax.
- The Income-tax Officer, the Appellate Assistant Commissioner, and the Appellate Tribunal all
rejected this claim. The question was referred to the High Court, which also ruled against the
assessee.

Issues:
1. Whether the portion of the income received by the assessee from Marsland Price,
proportionate to the agricultural income of the principal company, is "agricultural income" under
Section 2(1) of the Indian Income-tax Act, 1922.
2. Whether such income is exempt from income tax under Section 4(3)(viii) of the Act.

Law:
- Section 2(1) of the Indian Income-tax Act, 1922, defines "agricultural income."
- Section 4(3)(viii) of the Indian Income-tax Act, 1922, provides that "agricultural income" is
exempt from income tax.
- Case law:
- Gopal Saran Narain Singh v. Commissioner of Income-tax, Bihar and Orissa: An annuity
secured by agricultural land is not agricultural income.
- Commissioner of Income-tax v. Maharajadhiraj of Darbhanga: Income derived as rent from
agricultural land qualifies as agricultural income, regardless of the nature of the recipient's
business.
- Nawab Habibulla v. Commissioner of Income-tax, Bengal: Remuneration paid to a Mutawalli
(trustee) from a Wakf’s agricultural income does not constitute agricultural income.

Application:
- The assessee’s remuneration was derived from a contract of personal service and calculated
as a percentage of the net profits of the principal company (Marsland Price).
- The principal company’s agricultural income formed part of its total profits, but the assessee’s
remuneration was not paid out directly from the agricultural income itself; rather, it was a
general payment based on overall profits.
- The court held that income received from a contractual service agreement (like the managing
agency) is not transformed into agricultural income simply because the employer earns some of
its profits from agricultural activities.
- As in Nawab Habibulla, the fact that a portion of the employer’s income was agricultural did not
affect the nature of the managing agent’s commission, which was based on personal service
and not tied specifically to agricultural land or activities.
- Therefore, the assessee's remuneration could not be classified as agricultural income under
Section 2(1) and was not exempt under Section 4(3)(viii).

Conclusion:
The court ruled that the assessee's income derived from its managing agency agreement could
not be classified as agricultural income, even though it was based on the overall profits of a
company that derived part of its income from agricultural activities. The remuneration was not
agricultural income and was subject to income tax.

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This breakdown follows the FILAC method by clearly presenting the relevant facts, issues, laws,
application of those laws to the facts, and concluding with the court’s decision.